by Marc Fleischauer

The Ohio Supreme Court recently decided a case about non-competition agreements and the surprising effect of corporate mergers on their enforceability.  The decision changes Ohio law significantly and gives rise to urgent and specific drafting recommendations for employers.

In Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (2012), the Court was faced with a common scenario.  “Company A” had required certain employees to sign restrictive covenants (commonly called “non-compete agreements”) prohibiting solicitation of customers and other competition against Company A for two years following termination of employment.  Company A later merged with “Company B” to form “Company AB.”  The same employees continued working for Company AB for several years after the merger, doing the same jobs with no apparent interruption.

Roughly four years after the merger, the employees quit their jobs at Company AB and joined a competing business.  According to the Court, “They soon used their contacts to recruit multiple customer accounts from [Company AB].  Within six months, 19 customers had transferred $1 million in revenue….”

Company AB sued to enforce the employees’ agreements with Company A, based on the merger and the operation of Ohio Revised Statute § 1701.82.  That statute says that a newly merged company is “vested” in the contractual rights of the original companies “without further act or deed.”  Company AB maintained that it had automatically taken on all the same contract rights originally belonging to Company A.

The Supreme Court decided that indeed Company AB could enforce the agreements as written, but it added a huge caveat that dramatically altered the effect of mergers in Ohio going forward.  The employees had only agreed not to compete with Company A; the agreements did not expressly include similar restrictions against competing with Company A’s “successors and assigns,” which would have included Company AB.  So while Company AB could technically prevent competition with the now-defunct Company A, it was powerless to prevent competition against Company AB, according to the Court.

Further, the Court held that the same merger that had transformed Company A into Company AB was itself was a “termination of employment” event, starting the clock on the employees’ two-year non-competition requirement.  By the time the employees quit Company AB and started competing, any contractual obligations they had owed to Company A had already long expired.

In the current economic climate, corporate mergers and other acquisitions are commonplace as companies seek to consolidate or otherwise change their corporate status.  Often these corporate changes have little or no practical effect on employees, who at most might see a new name on their paychecks.  But with this new Supreme Court decision, employers may be inadvertently giving away their restrictive covenant rights.  To avoid an Acordia outcome, employers should take these steps now:

• Ensure that non-compete contracts define “company” to include “successors and assigns,” such that employees will remain contractually obligated regardless of what corporate form the employer takes in the future.
• Draft such agreements to make clear that mere mergers or other legal changes in corporate form do not trigger the post-termination commencement of the non-compete period.
• If you suspect that the company’s existing agreements are already susceptible to the new Acordia outcome, especially if your company has ever undergone a change in corporate structure, consider amending or rewriting existing agreements with the help of experienced employment counsel.